Short-selling: Brokers can provide contracts for up to 12 months

New Delhi: Regulator Sebi on Friday said market intermediaries can introduce contracts of different tenures ranging from 1 day to 12 months for short selling based on the requirement of participants.

The stock lending and borrowing (SLB) mechanism or short selling was designed to help the borrower to sell the shares he feels are overpriced but are not in his possession.

"AI (Approved Market Intermediaries) can introduce contracts of different tenures ranging from 1 day to 12 months based on the need of the market participants," Sebi said in a circular.

The decision has been taken after taking into consideration views of stock exchanges and other market participants.

According to the regulator, the market wide position limit for SLB transactions would be 10 percent of the free- float capital of the company in terms of number of shares.

For clearing member and institutional investor, Sebi said that position limit will be 10 percent of the marketwide position limit, while the same for client would be one per cent.

Explaining treatment of corporate actions during the contract tenure, Sebi said that dividend amount would be worked out and recovered from the borrower on the book closure/record date and passed on to the lender.

With regard to stock split, the regulator said the positions of the borrower would be proportionately adjusted so that the lender receives the revised quantity of shares.

Other corporate actions such as bonus, merger, amalgamation and open offer, "the contacts would be foreclosed on the ex-date. The lending fee would be recovered on a pro- rata basis from the lender and returned to the borrower".

"Any lender or borrower who wishes to extend an existing lent or borrow position shall be permitted to roll-over such positions -- a lender who is due to receive securities in the pay out of an SLB session, may extend the period of lending.

"Similarly, a borrower who has to return borrowed securities in the pay-in of an SLB session, may, through the same SLB session, extend the period of borrowing. The roll- over shall be conducted as part of the SLB session," Sebi noted.

The total duration of the contract after taking into account rollovers would not exceed 12 months from the date of the original contract. Multiple rollovers of a contract by the lender or borrower is permitted.

"Rollover shall not permit netting of counter positions, i.E. Netting between the 'borrowed' and 'lent' positions of a client," it said.

The Securities and Exchange Board of India (Sebi) has also directed the bourses and depositories to initiate necessary steps for the implementation of the modified framework, which would become effective from January 1, 2018.